Cigarette stocks, which went up in smoke at the start of the new calendar year following a steep excise duty hike, have since rebounded. This turnaround has been sparked by reports that companies like ITC are looking to increase the cigarette prices in the range of 20-40% to mitigate the impact of such tax hikes.
ITC shares have rebounded 7% from their February low, following a sharp 20% decline in January. Marlboro-maker Godfrey Phillips has staged a sharper recovery, surging 25% from its February low and recouping most of the 26% drop seen last month. VST Industries has also gained momentum, rising 5% so far this month and 9% from its February low.
Vinod Nair, Head of Research, Geojit Investments Limited, said, “Cigarette stocks have staged a strong rebound after companies implemented decisive price hikes to pass on the recent tax increases. The recovery comes after last month’s sharp correction, when the duty hike led to broad-based selling across the sector. With pricing adjustments now in place, near-term margin pressures appear more manageable.”
The excise duty hike, which came into effect from February 1, was announced by the government at the onset of 2026. The revised levy ranges from ₹2050 to ₹8500 per 1000 sticks based on the cigarette length, with a higher tax on longer sticks. Alongside, the government has recently increased the Goods and Services Tax (GST) on tobacco products to 40% from 28%.
Analysts have flagged that this duty hike may weigh on near-term margin due to price-led volume moderation.
Cigarette price hikes mitigate concerns
Reports of cigarette price hikes have prompted analysts to conclude that the worst may be over for these players. Some near-term impact on volumes could be visible, but cigarette demand in India has historically been inelastic.
According to media reports, these price hikes are expected to limit the EBIT decline to 2% from expectations of 8-15% earlier.
Harshal Dasani, Business Head at INVasset PMS, highlighted that cigarettes in India already attract one of the highest tax incidences globally, with GST plus compensation cess forming a significant portion of the retail price.
In that backdrop, calibrated price increases help offset cost inflation and protect EBITDA margins, which for leading players have historically been in the 30–40% range. The key here is the inelastic nature of demand in the premium and mid-segment categories, which gives companies pricing power without materially impacting volumes.
UBS, as quoted by CNBC TV-18, stated that ITC’s 84 mm cigarettes (KSFT segment) have seen the steepest tax increase, resulting in the price being raised to ₹24 from ₹17 earlier. While on the other extreme, the 64 mm cigarette is expected to be priced at ₹7 per stick from ₹5.9 earlier. While the pricing of 69 mm Goldflake is yet to be known, UBS said it expects it to be around ₹12 to be its new price (given competing Marlboro is at ₹11.5).
“It is clear that price hikes have been fully passed on in premium cigarettes, while it is kept minimal in price-sensitive segments of 69 mm and 64 mm. This pricing approach is likely to keep ITC’s volume and EBIT impact to a minimum,” said the brokerage as it maintained a ‘Buy’ rating on the counter.
Historically, moderate price increases, whether driven by taxation or company-led hikes have led to only marginal volume declines, as cigarette consumption tends to remain relatively sticky, especially in premium segments, said Pravesh Gour, Senior Technical Analyst at Swastika Investmart.
For ITC, which derives a smaller share of profits from cigarettes compared to its diversified FMCG, hotels, and agri businesses, the impact is even more cushioned; higher realisations often offset mild volume pressure, supporting margins, according to Gour. Meanwhile, Godfrey Phillips — which is more cigarette-focused — may see a slightly sharper near-term volume impact, but it can still benefit from improved pricing power and better operating leverage, particularly in premium and mid-tier brands, according to the expert.
Should you buy cigarette stocks now?
During the December quarter, ITC’s cigarette revenue grew better-than-expected by 8%, and volumes rose 7%, but the tax increase was flagged by brokerages as a key overhang.
From an earnings standpoint, even a low-to-mid single-digit price hike can translate into meaningful operating leverage, as per analysts, if volumes are maintained.
“While higher retail prices could temporarily weigh on volumes, cigarette companies have historically displayed strong pricing power, allowing them to protect profitability even in elevated tax regimes,” opined Nair.
He sees the recent valuation correction as presenting selective opportunities for investors, particularly in companies capable of sustaining margins and earnings through calibrated price actions.
Gour said that investors may consider accumulating these stocks on dips, as both companies enjoy strong brand power, high cash generation, and pricing flexibility.
However, near-term risks such as potential demand down-trading to illicit or cheaper products, regulatory uncertainty, and ESG-related investment constraints should be kept in mind, he added. “Overall, the sector tends to remain a stable cash-flow play rather than a high-growth opportunity, making it more suitable for investors seeking steady dividends and defensive exposure.”
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions.
